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McCain Matches Giuliani on Tax-Cut Call

Like his rival, the Arizona senator says he wants to slash the corporate income tax rate from 35 percent to 25 percent.
Stephen Taub, CFO.com | US
January 17, 2008

Republican presidential candidate John McCain on Thursday proposed a sharply lower tax rate and other tax breaks for business. His call to cut the the tax rate from 35 percent to 25 percent mirrors a plan floated last week by a rival candidate, Rudolph Giuliani.

McCain characterized his plan as "pro growth, less taxes, and less spending," the associated press reported. He also proposed establishing a permanent research and development tax credit and allowing tax breaks for equipment and technology investment.

For individuals, he only came out in support of retaining expiring tax cuts passed by Congress in President Bush's first term. Most other Republicans also support that policy

"One of the reason we have the difficulties we do is that spending went out of control," McCain reportedly said.

There is always a theoretical basis for drastically reducing tax rates, posits Robert Willens, a Lehman Brothers tax expert. For example, the supply-side school of economics is premised on the fact that reductions in tax rates stimulate economic activity, he notes. That means the increased activity leads to higher profits and taxable income and, therefore, tax revenues. So, the tax cuts pay for themselves, say proponents of the concept. "But, there is still much debate, as I understand it, as to the currency of this theory," Willens says.

One important effect of lowering the tax rate to 25 percent is that the companies with net deferred-tax liabilities that have been established using a 35 percent tax rate would be able to write down those liabilities (and record an equivalent amount of income), Willens told CFO.com. That's because, under Giuliani's plan, those liabilities would only "settle" at a 25 percent rate. "Thus, most of Corporate America would see an immediate and sizable boost to income and equity simply as a result of re-valuing their deferred tax liabilities."

Conversely, companies with net deferred tax assets would experience the opposite: They would have to write down those assets, and the amount of the write-down would result in a charge to income and equity, added Willens. "Most companies, fortunately, are in a net deferred tax liability position and, therefore, the effect of reducing tax rates would be largely positive," asserted Willens.

In October, another New Yorker, Democratic Congressman Charles Rangel, also proposed sweeping changes to corporate tax rules, including a big tax cut. Rangel, who heads the powerful House Ways and Means Committee — the group most responsible for writing U.S. tax policy — submitted a plan that would slash the top corporate marginal tax rate from 35 percent to 30.5 percent.

And although Rangel did not propose an across-the-board change to the capital gains rate like Giuliani, he did address dividend deductions that corporations receive. However, unlike Giuliani's pro-business stance, Rangel proposed to decrease the tax break for corporations. For example, for a 20-percent-owned corporation the deduction would drop from 80 percent to 70 percent. For dividends currently eligible for a 70 percent reduction, the tax break would fall to 60 percent.




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